Block 9/2b

*Subject to the completion of the EnQuest transaction announced 24 January 2012 – see detail below

Block 9/2b was awarded as Nautical’s first licence in the UKCS in September 2003. The Block is located on the East Shetland Platform, west of the North Viking Graben. Well 9/02-1A, drilled in 1985, had previously tested oil from a reservoir belonging to the Heimdal Sandstone Member of the Tertiary (Palaeocene) system. Since award of the licence, Nautical has drilled 5 appraisal wells and an exploration sidetrack, proving Kraken to be a substantial oil accumulation which can be now be progressed to development planning.

The results of 9/02b-2, the licence commitment well drilled in 2007, proved an oil column of at least 252 feet and an oil-downto (ODT) 168 feet deeper than 9/02-1A discovery. This appraisal well not only encountered oil bearing Heimdal Sandstone which can be correlated with the 9/02-1A well (known as Unit III sands) but also penetrated an additional deeper oil bearing Heimdal Unit I Sandstone.

A third appraisal well, 9/02b-3, drilled in September 2008, was located in a downdip area to the north-east of the discovery wells in order to substantiate the oil column by intersecting the Oil Water Contact (OWC) and to investigate the upside (P10) resources. However, in this outlying area, the Heimdal Sandstone proved to be absent.

Subsequent to the negative outcome of the 9/02b-3 well, significant work was undertaken to improve the understanding of the areal distribution of the reservoir and reduce the risk of further appraisal drilling, including a Controlled Source Electro Magnetic (CSEM) survey, depositional modelling, specialist seismic and sedimentology studies. This work led to the selection of an optimised appraisal location. Appraisal well 9/02b-4 was spudded in August 2010 and successfully encountered the target Heimdal Unit III Sandstone, with a gross oil column of 160 feet, substantially thicker and with a higher porosity than expected. Log evaluation indicated that the Heimdal Unit III main sand contained 83 feet of net oil pay with an average porosity of 38.8% and an average oil saturation of 87.2%. An oil water contact was not encountered in the Heimdal Unit III main sand in this well.

A well test using a test string comprising sand screens and an Electric Submersible Pump (ESP) was conducted on 9/02b-4 in order to recover uncontaminated reservoir fluid samples and to confirm the productivity of the reservoir. The well was initially pumped at a restricted rate of 300 barrels per day and samples obtained. Subsequent to this flow period, the productivity declined markedly which was believed to be due to the plugging of the sand screens, rather than a reservoir or oil quality issue. The test did not sustain production to surface but high quality fluid samples were collected.

Following the 9/02b-4 production test, the lower section of the well was abandoned and the 9/02b-4z sidetrack was drilled to validate an exploration target to the west of the Kraken Fault. The sidetrack successfully encountered oil bearing sands in both the Heimdal Unit III and Heimdal Unit II reservoirs with true net oil pays of 42 feet and 35 feet respectively. The average porosities in both units are very high, around 40%, with average oil saturations of 85%.

In July 2011, 9/02b-5 was spudded to further appraise the core area of the field. Preliminary log evaluation indicates a calculated net oil pay of 94 feet True Vertical Thickness (TVT), with average porosity of 38% and average oil saturation of 78%. As anticipated, an oil water contact was not encountered at this location and the Kraken discovery oil-down-to now extends to 3,947 feet True Vertical Depth subsea (TVDss). The well was plugged back and the 9/02b-5z sidetrack was drilled. This was a 2,003 foot
horizontal wellbore which had 1,598 feet of net pay with average porosity of 38% and average oil saturation of 90%. An openhole gravel pack completion was installed and the well was tested using an Electric Submersible Pump. The well flowed at a maximum stabilised rate of 4,550 bopd, an excellent result which exceeded the assumptions in the simulation model used in the development studies. The production rate was constrained by the surface testing equipment. Fluid samples were collected for characterization, flow assurance and oil marketing studies.

The results of the 9/02b-5 and -5z wells have shown an excellent correlation between the reservoir, depth and thickness, and the coloured inversion seismic data. This gives great confidence in the reservoir mapping and for the future placement of development wells.

Oil samples have now been recovered from the Heimdal Unit III reservoir from all 3 successful appraisal wells. Gravity of the oil is 14–15° API and viscosity is 80–160cp, being a higher API and much less viscous than both the adjacent Bressay (500cp) and Bentley (600–1,100cp) discoveries. The oil is more similar to that in the producing Captain Field (19° API and viscosity of 90cp), which came on production in 1997, peaked at 79,000 bopd in 2002 and is expected to exceed a 35% recovery factor.

Since an oil water contact has not been encountered in any of the wells, it is probable that the aquifer support will be through an edge water drive rather than a bottom water drive. This is supported by geochemical analysis which indicates that, although the oil is biodegraded, it is not water washed, implying that the water leg is remote from the core of the structure. These aspects enhance the opportunity to control water production and to design water injection to optimise both the oil production rate and the ultimate recovery from the reservoir.

Development planning and concept selection studies are under way. Nautical’s current plan is for a phased development, initially targeting the resources in the core area of the field. A Field Development Plan (FDP) is to be submitted in 2012 with first oil in 2015. As part of Nautical’s oil marketing initiative, it is encouraging to note that an assay has been carried out by a refiner who has expressed a strong desire to purchase Kraken crude.

25% Divestment to EnQuest plc
On 24 January 2012 Nautical announced that the company had reached agreement with EnQuest to divest a 25% interest in Block 9/2b & 9/2c. Subject to completion Nautical will retain a 25% interest in Block 9/2b & 9/2c. Subject to joint venture partner and Department of Energy & Climate Change approval EnQuest will become Operator.

In consideration for the transaction Nautical will receive a carry on its future expenditure on the Kraken field of up to $240 million, consisting of a $150 million firm carry and a contingent carry of up to $90 million. The value of the contingent carry will be calculated by reference to a determination of the gross 2P reserves in Blocks 9/2b & 9/2c by a competent person, as follows:

2P Reserves ≥166mmbo	$90 million carry on future costs
2P Reserves ≤100mmbo	$0 carry on future costs
2P Reserves between 100mmbo and 166mmbo	Pro rata between $0 and $90 million carry on future costs

The reserve determination will take place during the development drilling phase. The current estimate of 2C Resources for the Kraken field is 160mmbo, which is supported by an Independent Resource Opinion provided by Gaffney Cline & Associates on 15 July 2011, prior to the successful 9/02b-5z well test.

Whilst not part of this agreement with EnQuest, Nautical remains entitled to receive from Canamens North Sea Energy Limited an additional $5 million bonus upon Field Development Plan approval and payments totalling £7 million ($10 million) relating to sole risk activity on the 9/02b-4 and 4z wells.